Where the Bear Bit Hardest


By Sam Stovall Though the stock market has rallied smartly over the past 15 months, investors probably won't be surprised to hear that, as of Jan. 16, 2004, the S&P 500 was still more than 25% off its all-time closing high of 1,527, which it reached on Mar. 24, 2000. But many probably would be taken aback to hear that the average stock in the S&P 500 is down only 1.3% in that time. How can this be? Simply put, it's due to the effects of market value and sector influences on overall price performances.

Take a look at the table below, which shows the current weightings of the 10 sectors in the S&P 500 and the average company price change by sector since their market highs in 2000.

Avg. company price change by sector since 2000 market highs

S&P 500 Sector

Mkt. weight in index

Avg. % price change

Industrials

11.0%

6.9%

Consumer Discretionary

11.1%

5.1%

Materials

2.9%

4.7%

Financials

20.6%

1.2%

Health Care

13.1%

-2.1%

Consumer Staples

10.6%

-7.0%

Energy

5.6%

-11.0%

S&P 500

100%

-25.4%

Utilities

2.8%

-29.6%

Info. Tech

18.7%

-58.6%

Telecom Svcs.

3.5%

-61.9%

At first glance, one would expect to see Info Tech and Telecom at the bottom of the pile. Yet the magnitudes may be a bit startling. To help put the tech sector's performance into perspective, remember that the Nasdaq -- despite its more than 90% jump since the bottom on October 9, 2002 -- is still down nearly 60% from its 2000 closing high of 5,048.62.

It's also worth looking at one other notable laggard: Utilities. The reason the sector index performed so poorly since 2000, in our view, is that even though the electric-company group represents about two-thirds the weight value of the entire sector -- and is up more than 19% since Mar., 2000 -- the average individual performances in the sector were skewed by the price poundings taken by the companies in the S&P Multi-Utilities and Unregulated Power sub-industry index (a.k.a., the surviving energy traders).

5-STAR CONSTELLATION. Interestingly, four of the sectors -- Industrials, Consumer Discretionary, Materials, and Financials -- posted advances of 1% to nearly 7%. But since these groups didn't participate equally in the market's meteoric advance, nor the bubble's burst, their subsequent rebound should come as no great surprise, in our opinion. Nor did the recovery of the U.S. economy didn't hurt these economically sensitive issues.

Today, S&P believes opportunities continue to be found in the U.S. markets. We're looking for the S&P 500 to end 2004 at 1,190, for a 7% full-year price appreciation, before dividends. By sector, S&P equity analysts have a concentration of 5-STARS (buy) recommendations in the Consumer Discretionary, Health Care, and Information Technology sectors, and recommend underweighting the Telecommunications Services and Utilities sectors.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of January 16, 2004.

Industry/Sector

Company

S&P STARS* Rank

Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked

Communications Equipment/Info. Tech

Cisco Systems (CSCO)

5 STARS

Computer Storage & Peripherals/Info. Tech

Lexmark (LXK)

4 STARS

Consumer Electronics/Consumer Discretionary

Harman International (HAR)

4 STARS

Diversified Metals & Mining/Materials

Phelps Dodge (PD)

4 STARS

Electronic Equipment Manufacturers/Info. Tech

Vishay (VSH)

5 STARS

Homebuilding/Consumer Discretionary

D.R. Horton (DHI)

5 STARS

Internet Retail/Info. Tech.

eBay (EBAY)

3 STARS

Internet Software & Services/Info. Tech.

Yahoo! (YHOO)

3 STARS

Semiconductor Equipment/Info. Tech.

Applied Materials (AMAT)

4 STARS

Semiconductors/Info. Tech.

Intel (INTC)

5 STARS

* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's


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